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The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 passed Parliament last week and received royal assent shortly after. It introduces design and distribution obligations into the Corporations Act 2001 (Cth), requiring financial services entities to consider the design of their retail financial products and the way they are distributed. The amendments to the Corporations Act 2001 (Cth) also give the Australian Securities and Investments Commission (ASIC) power to intervene in situations where there may be significant consumer detriment. The reforms were first proposed in 2014 by the Financial System Inquiry as a way to address the perceived ineffectiveness of giving lengthy disclosure documents to retail clients, and closely mirrored regulatory reform introduced in the United Kingdom in 2013.
The first draft of the legislation was first read in Parliament in September 2018 and initially applied to retail financial products requiring disclosure under the Corporations Act 2001 (Cth). We wrote about the proposed reforms in the Australian Insurance Law Bulletin (see vol 33 no 10). Following the release of the Royal Commission’s Final Report, the legislation was expanded to:
The design and distribution obligations will take effect from April 5, 2021. From this date, financial products can only be distributed to retail clients if the product issuer, who is also responsible for preparing the product disclosure statement, has made a target market determination under section 994B. Section 994B(3) lists some exemptions from this general requirement and also enables further exemptions to be specified by regulation.
The objective of the target market determination is to ensure that when the product is sold to retail clients, the retail client would likely be in the target market and the product would be consistent with the retail client’s likely objectives, financial situation and needs. Under section 994E, the person who makes the target market determination must take reasonable steps to ensure the retail product distribution conduct is consistent with the determination. This will undoubtedly add compliance costs for the product issuer who needs to oversee distribution by intermediaries, and significantly blurs the traditional distinction between the legal obligations of product issuers and distributors, even where both separately hold AFS licenses.
Although ASIC’s product intervention power is already in force, the design and distribution obligations will only apply from April 5, 2021. ASIC has not yet released regulatory guidance on the new provisions.
During the transition period, insurers should undertake a review of affected retail products and distribution channels, and prepare target market determinations ahead of time. These will inform what changes will need to be made to products and their distribution methods. Prompt action should be taken where the review identifies a retail product that may result in significant consumer detriment. Sales practices, incentive arrangements (e.g. front line commissions) and third party distribution arrangements are all likely to be impacted by the changes. Close attention needs to be given to the full product lifecycle and distribution arrangements to enable compliance with these obligations. Insurers should also consider how they will comply with the new record-keeping and reporting obligations.
On July 15, 2019, the Ministry of Justice announced changes to the Ogden rate in England and Wales. An increase in the rate from -0.75 percent to -0.25 percent fell short of insurers’ expectations who were hoping for a much greater discount, prompting warnings that premiums may rise as a result. The new rate came into use on August 5, 2019.
Insurers have argued that this is inadequate and will breach the principle of 100 percent insurance, as it will result in over-compensated claimants. The decision is likely to cost the insurance industry millions of pounds. Shares in some UK motor insurers fell after the change was announced.
Set by the UK government, the Ogden rate is used with the Ogden tables to help courts work out the size of the lump sum payments for complex personal injury liability claims. The discount is applied to a lump sum to reflect how much interest the victim of an accident would earn if the compensation was prudently invested. The higher the discount, the less the insurer must pay up front.
In the commercial market, there will be two key results:
The Ogden rate was previously set at 2.5 percent until 2017 when it dropped to -0.75 percent which had a huge economic impact on insurers. The new rate, although higher at -0.25 percent, is not what insurers had anticipated.
On October 1, 2019, the Government Actuary determined that the discount rate in Scotland should remain at -0.75 percent. In Northern Ireland the discounted rate remains 2.5 percent because this matter is reserved to the Northern Irish assembly, which has not met since January 2017.
The European Insurance and Occupational Pensions Authority (EIOPA) issued nine recommendations to the National Competent Authorities (NCAs) with responsibility for the supervision of insurance undertakings and insurance intermediaries in European Union (EU) Member States.
The recommendations provide the NCAs with guidance on EIOPA’s expectations in relation to the treatment of UK authorized insurance undertakings and intermediaries that cover risks in their jurisdiction after the UK leaves the EU. The recommendations will only apply if the UK leaves the EU without a withdrawal agreement in place (a no-deal Brexit). In the event of a no-deal Brexit, the UK will become a ‘third country’. Insurance undertakings and intermediaries will lose the benefits of access to the EU Single Market and will cease to be authorized to write new business, pay existing claims or undertake insurance distribution activities.
The recommendations come at a time when a number of EU Member States have introduced measures to protect EU policyholders of UK policies in the event of a no-deal Brexit. So far the countries that have introduced such measures include France, Germany, Ireland and Luxembourg.
The recommendations include:
The recommendations will only be applicable should the UK leave the EU without an agreement in place. However, EIOPA will expect NCAs to introduce measures to meet the above recommendations (or explain why they have not done so) and confirm the status of such measures within two months from publication (and translation) of the recommendations.
Where an insurance policy included reinstatement value conditions and the insured had taken immediate steps to comply with the reinstatement conditions, the insured could rely on the clause as long as the insured was genuinely desirous of restarting the business but was unable to do so because of the insurer’s unjustifiable decision not to indemnify under the policy.
The proviso to the reinstatement value conditions that they are ‘without force or effect if the insured is unable or unwilling to replace or reinstate the property on the same or another site’ does not exclude an inability to replace or reinstate if money was not available because the insurer withheld the indemnity payment obligation.
The court granted judgment for the insured of the replacement value fixed by the experts in evidence. The court also awarded interest on the amount at the legal rate of 15.5 percent from September 2011 when the costs of reinstatement had been established.
The case is Watson v Renasa Insurance Company Limited.
Section 5(1) of the Insurance Act 2017 prohibits any person from conducting insurance (including reinsurance) business in South Africa unless licensed under the Act. Under section 5(2), a foreign re/insurer will be regarded as conducting insurance business in South Africa if that foreign re/insurer, or another person on its behalf, directly acts in South Africa in respect of the foreign insurance business. The wording of section 5(2) is wide and includes intermediary services performed on behalf of the foreign re/insurer.
In April 2019, the Prudential Authority (PA) and Financial Sector Conduct Authority (FSCA) issued guidance on the application of section 5(1) and (2). The guidance is issued under section 141 of the Financial Sector Regulation Act 2017. The guidance is for information and is not binding; but it will help to understand the authorities’ attitude to enforcement of the Act.
The guidance confirms:
Attachment 1 to the guidance provides useful examples of direct and indirect conduct that will be regarded as conducting business in South Africa.
The guidance seeks to expand the scope of the deeming provision in section 5 so that a foreign re/insurer will be regarded as conducting business in South Africa if it ‘in any way… influenced’ the placing of business with it. This is overly broad, and goes beyond the test of agency referred to in section 5.
The PA or FSCA will engage with the foreign re/insurer in the first instance in regard to a suspected contravention of section 5. If not resolved, the authorities may pursue the matter further with the relevant foreign regulator or against relevant persons located in South Africa.
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